MODERN APPROACH TO FINANCIAL MANAGEMENT

Henry Ford has once remarked “Money is an arm or a leg; you either use it or loose it”. Though the above statement looks simple but it is quite meaningful. In the today’s money oriented economy finance is one of the basic foundations of all kinds of economic activities. Actually finance is the backbone of every business.

MEANING OF BUSINESS FINANCE

Business Finance is the business activity that is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of a business enterprise. There are three A’s in Financial Management

Handling a business is similar to handling a home, with all the different expenses to consider preventing the business from going under with deficits and bankruptcy. A business has “children” in terms of all the employed workers working hand-in-hand and with utmost efficiency to make sure that the finances float above break even. There is one main focus for a business to thrive and exist in security and balance, and that is the knowledge of knowing how to manage money in business with the overhead and operation expenses.

THE RIGHT APPROACH

According to the modern approach the term financial management provides a conceptual and analytical framework for financial decision making. That means, the finance function covers both acquisition of funds as well as their allocation. This new approach views the term financial management in a broader sense. It is viewed as an integral part of overall management.

The modern approach of financial Management can be divided into four major decisions as function of finance:

This is concerned with the allocation of capital. It has to show the funds can be invested in assets which would yield benefit in future. This is a decision based on risk and uncertainty. Finance Manager has to evaluate the investment in relation to their expected results and risk to determine whether the investment is feasible or not.

FINANCIAL DECISIONS

This decision is concerned with the mobilization of finance for investment. The Finance Manager has to take the decisions regarding the acquisition of finance. Whether entire capital required should be raised in the form of equity capital or the amount should be borrowed totally or a balance should be struck between equity and borrowed capital has to be decided. Even the timing of acquisition of capital should also be perfectly made.

DIVIDEND DECISION

The dividend decision involves the determination of the percentage of profit earned by the enterprise which is paid to the shareholders. The dividend payout ratio must be evaluated in the light of the objective of maximizing shareholder’s wealth. Thus, the dividend decision has become a vital aspect of financial decision.

CURRENT ASSETS MANAGEMENT

The Finance Manager should also manage the current assets to have liquidity in the business. Investment of funds in current assets reduces the profitability of the firm. However the finance manager should also equally look after the current financial needs of the firm to maintain optimum production. While investing in current assets, he should see that proper trade off is maintained between the profitability and liquidity.